How to Buy Stocks On Margin

Buying stock on margin merely means that you borrow money from your broker to buy stock. Typically, you are allowed to buy twice as much stock as the amount of money that you have actually deposited into your account would normally allow you to buy, but the amount of margin you are allowed at any time can vary.There will be a small charge for the money you are borrowing.

Instructions

Difficulty: Easy

Things You’ll Need:

• A brokerage account which allows margin purchases

How to Buy Stocks on Margin

1. Contact your broker or brokerage firm and ask if your account allows for margin trading.
2. Fill out the paperwork required for opening a margin account. Since a margin account is basically a form of credit, the questions you will be asked will concern your creditworthiness.
3. Ask your broker how much margin you will be entitled to. Generally, you will be allowed to purchase stock on margin that is equal to twice the amount you have deposited into your trading account. In other words, if you have deposited $10,000 into your trading account you will be allowed to margin $10,000 worth of stock, permitting you to purchase a total of $20,000 in stock.Margin amounts can vary, however, so ask your broker for details.
4. Ask what the fee for buying stock on margin is. The fee is usually small, but can vary from broker to broker. You are only charged the margin fee when you are actually using your margin funds.
5. Be prepared for a possible "margin call." A margin call happens when the value of the stock you have purchased on margin drops below a certain level and the value of the stock is no longer sufficient to collateralize the money you have borrowed. A margin call will require that you deposit additional money into your account so that the broker's margin loan is once again collatoralized. You will only have a limited time to make such deposits.

Tips & Warnings

• Be cautious in your use of margin because if the value of your stocks drop to the point where they no longer collateralize, your loan you could receive a margin call and be forced to deposit additional cash into your account on very short notice.
• If the value of your stocks drop to a certain level, your broker may be permitted to liquidate all or a portion of your stock holdings to bring your margin account back into line with the requirements of the brokerage house.